Pass on GST exemption benefits fully: Finance ministry to insurers

In a significant move to make insurance more affordable and widen its reach, the Ministry of Finance has directed insurance companies to fully pass on the benefits of the recent GST exemption on individual life and health insurance policies to both existing and new policyholders. This reform is expected to give a strong push to insurance penetration across India and strengthen financial security for citizens.

Key Decision by the GST Council

The GST Council recently decided to scrap the 18% GST levied on individual life and health insurance policies.

Earlier, insurance premiums attracted 18% GST, which increased the cost of buying policies.

The exemption is aimed at making insurance products more accessible and cost-effective, encouraging more people to purchase life and health insurance.

Finance Ministry’s Directive to Insurers

In a high-level meeting held on Monday, M. Nagaraju, Secretary of the Department of Financial Services (DFS), instructed insurers to ensure the full benefit of the GST exemption reaches policyholders—including those who already hold policies as well as prospective customers.

Nagaraju stressed that companies must reduce premiums accordingly and communicate these changes to customers.

Industry Concerns Over Input Tax Credit (ITC)

While welcoming the GST exemption, insurers highlighted a key concern:

Loss of Input Tax Credit (ITC)—Earlier, insurers could offset the GST they paid on their own expenses (such as office maintenance, marketing costs, and agent commissions) against the GST collected from policyholders.

With the GST exemption, insurers cannot claim these credits, potentially increasing their own operational costs.

Some companies warned that this denial of ITC could limit their ability to reduce premiums fully, as their costs of servicing policies remain subject to GST.

Government’s Stand

Despite these concerns, the finance ministry is clear that policyholders must receive the complete benefit of the GST exemption.

Nagaraju emphasised that the move’s objective is to make insurance affordable for the common man, and insurers are expected to comply in both letter and spirit.

Outreach and Awareness Campaigns

The DFS has directed insurance companies to launch proactive outreach campaigns to:

Publicise the GST reforms, and

Highlight the positive impact on affordability and financial security.

This awareness drive will help customers understand the reduction in insurance costs and encourage wider adoption of life and health insurance.

Impact on Policyholders and the Insurance Sector

Lower Premiums: The removal of 18% GST will directly reduce the cost of life and health insurance policies for both new and existing customers.

Greater Insurance Penetration: More affordable premiums are expected to increase insurance adoption, especially among the middle class and rural households.

Financial Security: Wider insurance coverage will strengthen the country’s social and financial safety net.

Industry Adjustment: Insurers will need to reassess their pricing structures to absorb the impact of lost ITC while maintaining profitability.

Conclusion

The GST exemption on life and health insurance premiums is a landmark reform aimed at making insurance affordable and accessible to all Indians. While insurers face operational challenges due to the withdrawal of input tax credit, the finance ministry has made it clear that the full benefit must be passed on to policyholders.

This policy shift is expected to boost insurance penetration, strengthen financial protection for families, and support the government’s vision of inclusive financial security across the nation.